Health Reform WK-EDGE Government in breach of contract for failure to make risk corridor payments
Tuesday, August 15, 2017

Government in breach of contract for failure to make risk corridor payments

By Jeffrey H. Brochin, J.D.

An insurer who sold health insurance plans through Health Benefit Exchanges under the under the Patient Protection and Affordable Care Act (ACA) (P. L. 111-148), was entitled to partial motion for summary judgment when the government failed to make risk corridor payments under section 1342 of the ACA to cover the insurer’s losses, the U.S. Court of Federal Claims has ruled. The government’s promise to pay constituted an implied-in-fact contract, and Congress did not clearly or adequately express an intent to make the program budget neutral (Molina Healthcare of California, Inc. v. U.S., August 4, 2017, Wheeler, T.).

Background. When Congress created the risk corridor program in Section 1342 of the ACA it called upon the Secretary of HHS to establish and administer a program of risk corridor for calendar years 2014, 2015, and 2016. Under the program, a qualified health plan (QHP) offered in the individual or small group market "shall participate in a payment adjustment system based on the ratio of the allowable costs of the plan to the plan’s aggregate premiums." In July and September of 2013, various Molina Healthcare insurers (Molina) executed their respective 2014 QHP Agreements in California, Florida, Michigan, New Mexico, Ohio, Texas, Utah, Washington, and Wisconsin. Molina in Florida alleged that it suffered losses due to ACA participation, but was only paid a small fraction of its 2014 risk corridor payments from the government. Molina insurers in other states claimed that they suffered losses but received no payments whatsoever from the government.

Molina filed suit seeking more than $52 million in unpaid risk corridor payments for years 2014 and 2015, and a declaration that the government had to pay the full 2016 risk corridor payments (see Another risk corridor claim moves forward, March 29, 2017). For the reasons stated below, the court granted Molina’s motion for partial summary judgment and denied the government’s motion to dismiss the statutory and implied-in-fact contract claims.

Transitional Policy Letters. Shortly after Molina and other insurers began selling QHPs, it became apparent that some consumers’ health insurance coverage would be terminated due to lack of compliance with the ACA. To minimize that hardship, HHS announced a transitional policy in November 2013, under which health plans in the individual or small group market that were in effect on October 1, 2013 were not considered to be out of compliance with the ACA’s market reforms for the 2014 plan year. HHS acknowledged the transitional policy’s impact on insurers in its announcement, stating, "Though this transitional policy was not anticipated by health insurance issuers when setting rates for 2014, the risk corridor program should help ameliorate unanticipated changes in premium revenue. We intend to explore ways to modify the risk corridor program final rules to provide additional assistance." HHS renewed the transitional policy twice, with its latest iteration being extended through October 1, 2017.

Although HHS cited the risk corridor program as an ameliorating force in the Transitional Policy Letter, it noted for the first time, in further rulemaking on March 11, 2014—two months after Molina began offering QHP—that it intended to implement the program in a budget neutral manner. In adopting budget neutrality as a goal for the risk corridor program, HHS reversed the statement it had made one year earlier, and, the Congressional Budget Office (CBO) indicated its disagreement with HHS’s budget neutral interpretation.

Payments in-payments out. HHS anticipated that "payments in" to the risk corridor program would equal or exceed "payments out" of the program, but subsequently realized that implementing the program in a budget neutral manner might result in a shortfall in risk corridor payments to insurers. On April 11, 2014, HHS released a two-page memorandum to address the situation in which it noted that if risk corridor collections were insufficient to make risk corridor payments for a year, then all risk corridor payments for that year would be reduced pro rata to the extent of any shortfall. Risk corridor collections received for the next year would then first be used to pay off the payment reductions issuers experienced in the previous year in a proportional manner, up to the point where issuers were reimbursed in full for the previous year, and would then be used to fund current year payments.

History of risk corridor payment rulings. Molina alleged that it was entitled to the $52 million in damages on the basis of several legal theories including violation of federal law, breach of express contract, breach of implied-in-fact contract, breach of an implied covenant of good faith and fair dealing, and a taking without just compensation in violation of the Fifth Amendment. Just a couple of weeks after Molina filed its lawsuit, the court issued its decision in the Moda Health Plan, Inc. case, holding that another insurer participating in the risk corridor program was entitled to its unpaid risk corridor payments on the grounds that the government violated a statutory duty to make full annual risk corridor payments or, in the alternative, that it breached an implied-in-fact contract created by the ACA risk corridor program (see Court is firm: insurer entitled to $214M risk corridor payment, February 15, 2017).

The court noted that in all of the similar cases, the court had denied the government’s motion to dismiss, finding that the plain language of Section 1342 which states that "HHS will pay qualified insurers" is clearly money-mandating. Furthermore, courts have ruled that the risk corridor program mandates annual payments because the statute requires HHS to calculate "payments in" and "payments out" for "any plan year" separately, and there was no indication that the statute meant anything other than what it said, namely, that payment was to be made on a yearly basis.

"Ripeness" versus "presently due." The government did not challenge that Section 1342 was a money-mandating statute, but rather contended that any damages stemming from a violation of a statute or a breach of contract were not presently due, and therefore not ripe. The court uniformly rejected the government’s argument that the insurers’ claims were not ripe, and noted that the government conflated the ripeness requirement with a requirement that all damages be "presently due." In the facts of the present case, as in the other risk corridor payment cases, any payments that Molina was entitled to were not contingent on equitable relief.

Conclusions. The court concluded that there existed no genuine dispute that the government entered into an implied-in-fact contract with Molina when it agreed to pay Molina a specified portion of its losses if Molina sold QHPs. Molina sold QHPs, suffered losses, yet the government refused to make the full payments it promised to Molina. Thus, there was no genuine dispute that the government was in breach. Accordingly, the court granted Molina’s motion for partial summary judgment on its Count III—breach of implied-in-fact contract claim—and denied the government’s motion to dismiss Count III.

The case is No. 17-97C.

Attorneys: Lawrence S. Sher (Reed Smith LLP) for Molina Healthcare of California, Inc. and Molina Healthcare of Florida, Inc. Charles Edward Canter, U.S. Department of Justice, for the United States.

Companies: Molina Healthcare of California, Inc; Molina Healthcare of Florida, Inc.

Cases: CaseDecisions AgencyNews HealthInsuranceExchangeNews InsurerNews ProgramIntegrityNews CtFedClaimsNews NewsFeed

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